Iceland FSA Ends Bank Fraud Probe Warning Against Free Currency

By Omar R. Valdimarsson -
Feb 14, 2013

Iceland completed its investigation
of the financial fraud that led to the island’s 2008 collapse
with the top regulator warning that the bank system is still too
weak to survive a free-floating krona.

The Reykjavik-based Financial Supervisory Authority
yesterday wrapped up more than four years of investigations,
which included 205 cases of financial malpractice, 103 of which
were referred to the prosecutors. Fines were imposed in four of
the cases, while 98 were dropped.

The island imposed currency restrictions after its three
biggest banks collapsed in 2008, defaulting on $85 billion that
the $13 billion economy didn’t have the means to honor. The
failures triggered a krona sell-off, sending the currency down
as much as 80 percent against the euro, offshore. Investors with
about $8 billion in krona assets are still trapped behind the
controls.

“If we’re thinking about removing the capital controls,
both the banks and the economy as a whole, and the krona’s
exchange rate are in question,” Unnur Gunnarsdottir, chief
executive officer at the financial watchdog, said in an
interview yesterday in Reykjavik. Iceland “hasn’t completed all
the challenges it’s dealing with,” she said.

The central bank has had limited success in reducing the
krona overhang and earlier this month accepted just 5.7 billion
kronur ($44 million) out of a total of 9.3 billion kronur in
bids in one of its dual currency auctions.

‘A Failure’

The bank is seeking to phase out the controls through a
program designed to take pressure off the krona even as
investors sell their holdings by offering financial benefits and
the option of reinvesting. Though the bank has indicated the
controls may be removed by 2015, it has emphasized targets are
linked to financial and economic goals rather than dates.

Limited interest in Sedlabanki’s auctions has led the bank
to lower by half the minimum amounts required to participate.

That shows the bank is missing its target, said Lars Christensen, chief emerging markets economist at Danske Bank A/S
in Copenhagen.

“By lowering the amounts the central bank is signaling
that so far the bank hasn’t been reaching its goals,” said
Christensen. “The auctions have henceforth been a failure.”

The International Monetary Fund said in November Iceland is
unlikely to be able to remove the currency controls before 2015.
Finance Minister Katrin Juliusdottir said in October the most
viable prospect is to keep some form of currency controls in
place until Iceland can join the euro. The nation started
European Union membership talks in 2010.

‘Modest’ Amount

As of November, Iceland’s exchange-rate auctions had
released a “modest” amount of kronur, equal to 4.5 percent of
gross domestic product, according to the IMF. The progress has
been “partly offset” by payments on offshore kronur and
currency released by the estates of the failed banks, leaving
offshore kronur equal to about 23 percent of the economy, the
IMF estimates.

“Iceland’s financial sector is tied to the capital
controls,” said Gunnarsdottir. “For that reason alone, it’s
not as healthy as we’d want it to be. The owners of the banks
are the Treasury and creditors” of Iceland’s failed banks,
Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf.

“That’s not the healthiest form of ownership” or the kind
of ownership structure “that we’d like to see,” she said.

‘Taking Root’

Local investors, including shareholders in MP Banki hf and
the Iceland Enterprise Investment Fund, are in talks with the
winding up committees of Kaupthing and Glitnir on purchasing
shares in Arion and Islandsbanki, Morgunbladid reported
yesterday, without saying how it obtained the information.

Glitnir is 95 percent owned by its creditors and Arion 87
percent. The government holds the rest.

Iceland, which completed a 33-month IMF program in August
2011, is outgrowing much of Europe as it rebounds from its
deepest recession in six decades. The recovery is “taking
root” and a fiscal consolidation is “broadly on track,” the
IMF said. Iceland’s GDP expanded 2.6 percent last year and will
grow 2.3 percent this year, the Washington-based fund estimates.